«The value of a stand-alone rating engine As more carriers move from legacy policy administration systems (PAS) to newer technologies, critical ...»
The value of a stand-alone
As more carriers move from legacy policy
administration systems (PAS) to newer
technologies, critical choices must be made:
Do they choose an all-in-one policy suite, a bestof-breed approach, or something in between?
As important, will the rating functionality
provided by their new policy solution enable
them to quickly and easily respond to rapidly
changing market conditions? Will it position them as market leaders—or followers? This paper discusses the reasons a stand-alone rating engine deserves due consideration in the decision process.
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BUSINESS AND IT AGREE: OUTDATED TECHNOLOGY
INHIBITS GROWTHCarriers today are in the unenviable position of making some very difficult decisions.
Company executives are getting an earful from their actuarial and product
“Our current systems are archaic. We can’t do any of the innovative pricing scenarios we need to remain relevant in this competitive market. We keep hearing NO from our IT department every time we want to implement something. And, on the infrequent occasion we hear a YES, it takes far too long to create the change and move it out to insured’s. What was innovative nine months ago has become old news.” “Also, since we are the pricing and product experts…why can’t we be involved with the changes we are requesting?”
Company executives are also hearing complaints from their IT leaders:
“Our team is bogged down trying to keep our systems up and running and supporting the requests from the actuarial and product management teams.
We have significant technology goals on our roadmap that we can’t get to because our current system is consuming all of the resources’ time.” “Also, since the pricing and product teams are the experts…why can’t they be more involved with the changes they are requesting?” Everyone agrees that it is increasingly difficult to maintain profitable growth while using outdated technology.
THE SHORTFALLS OF POLICY ADMINISTRATION
SYSTEM EMBEDDED RATINGAlthough replacing the PAS will go a long way towards remedying the problem, it may not solve arguably one of the biggest issues—one that impacts revenue and the company’s ability to create and maintain innovative insurance products. The new PAS may fall short in supporting the algorithm complexity required by the actuarial and product management teams, and it may not provide the organizational flexibility being sought.
ADVANTAGES OF STAND-ALONE RATINGRating is a core function of a carrier’s success and directly impacts their bottom line.
A product focused exclusively on rating to meet their strategic objectives and
provides the following benefits:
Ability to design complex rating products • Shorter time to profitability • Organizational flexibility • Enterprise rating • Scalability and extensibility • Ability to design complex rating products Although some PAS platforms provide rate management using a configuration toolset, most do not extend that capability to the algorithms. As a result, these business rules/algorithms must be created and maintained in code, requiring ITownership and eliminating the possibility of maintenance by a business user.
Actuaries have begun moving away from traditional pricing models based on historical premium, exposure, claims data, supplementary industry and competitor information, and assumptions based on future market trends. Now, with the exponential growth and availability of data (both structured and unstructured), actuaries are abandoning linear models and designing highly complex dynamic models that use multi-dimensional rate plan analysis. These new techniques not only improve the accuracy of the insurer’s pricing (keeping risk aligned with price), but it also gives them the potential to differentiate in the marketplace. However, the rating provided by PAS embedded rating engines typically is rudimentary and does not allow for the level of complexity mandated in the insurance market today.
Technology and external market pressures will force the insurance industry to evolve, with Personal Automobile leading the way (Figure 1). As data availability increases and pricing shifts away from backward-looking (risk history) models, to current and even forward-looking models, pricing sophistication will be at the forefront of the P&C insurance industry.
Figure 1: Impact of data and technology on Personal Automobile rating:
Shorter time to profitability Updates to rating logic in a PAS platform may still involve a significant amount of IT involvement. Implementation time is extended by the need to secure IT resources and conduct a requirements handoff between business and IT. In contrast, standalone rating engines externalize rating rules and content and give business users the ability to update with minimal support from IT, dramatically simplifying and speeding up product updates, accelerating implementation time on average by 75 percent.
Full core system replacement can be an extensive and time consuming endeavor.
Given the benefits that a rating engine can provide and the potential risks and longer timeframes associated with full system replacement, many carriers are choosing to deploy rating engines before or during the PAS implementation. If they are taking on the expense of a new policy platform, the sooner they can begin increasing their profits, the better positioned they are with their budgets. Carriers using a rating engine have an almost immediate return on their investment by reducing product and rating support needs and increasing the speed of changes— all within the first year.
Organizational flexibility As carriers move from outdated legacy systems, they begin to reassess how best to use their resources. Where in the past all things flowed through IT, the introduction of specialized toolsets, like a rating engine, allows the IT group to share the wealth with other departments and focus on newer, more strategic technology pursuits.
Carriers understand that the skillset to maintain PAS front-end business rules, external call-outs, screen creation, and screen flow is not the same skillset that is required for rating creation and maintenance.
A rating engine would provide the carrier the option of assigning as much of the product ownership to the business as they are comfortable with. Rating engines enable the business person to design, construct, and test the algorithms and rate tables in support of the insurance product. This “business person” can sit anywhere within a carrier’s organization: in product management, actuarial, or even IT.
Although a rating engine would be considered a business product, there are some organizations that would prefer to have IT be the driver on all technology pursuits, including the purchasing and running of applications such as a rating engine. As a result, IT would continue to manage and own it. In other organizations, IT has adopted the philosophy that passing the responsibility of rate and rule maintenance to the individuals who created the business requirements would increase operational efficiencies, decrease product development time, and reduce the risk of noncompliance due to miscommunication.
Enterprise rating Rating engines are independent callable engines that are not a function of an integrated suite. They can be the sole source of rating across multiple platforms and solutions. Carriers who run multiple PAS, web quoting systems, predictive analytics and comparative raters end up replicating rating logic in multiple places. This leads to discrepancies and extended development timeframes, as each system needs to be updated with new filings. This is further compounded if a carrier is transitioning from a legacy application to a new PAS technology and must run both in parallel for a specified time. A rating engine would centralize the rating process and ensure consistency across a carrier’s systems.
Scalability and extensibility “Scalability” has become a popular buzzword in the hardware and software industry, with many companies claiming their solutions can adapt to future increased demands. Ultimately, system scalability is the capability of software to handle an ever-increasing amount of work without requiring extensive and expensive modifications, or even worse, having to replace the software altogether.
Proven scalability is critical to an organization because it means that they can invest in a system with confidence, knowing it can grow along with the organization.
As carriers begin to refocus on growth, rather than cost cutting and other bottomline measures, executives are looking to expand into new products and services and entering new markets. What increased demands, mandated by these new growth strategies, are forcing systems to become scalable? Insurance carriers have
identified three critical scalability dimensions:
Organizational scalability. The ability to increase the number of users as the • rating product is rolled out to additional distribution channels.
Load scalability. The ability to support policies with a large number of rating • items—vehicles, locations, class codes, coverages, etc.
Functional scalability. The ability to modify the pricing rates and rules of an • insurance product quickly and with minimal effort.
Rating engines, being specific in their sole purpose, scale extremely well across all these dimensions.
CONCLUSIONThe world of insurance is changing faster every day and companies have their hands full trying to keep ahead of the wave instead of being buried by it.
Technology advances are a double edged sword—allowing companies to customize their brand and have access to many more channels, but also burdening their IT budgets with massive expenditures. Carriers are presented with options on how best to prioritize their goals and meet budgetary constraints. Insurance company executives appreciate that their unique insurance programs are what differentiates themselves from a very crowded industry and mandate that the software they use not limit them to simplistic pricing, but challenge them to become more innovative.
While many PAS platforms include embedded rating, a stand-alone rating engine would empower the business user to quickly design complex dynamic rating models and enable the IT department to focus on key initiatives to bring their company into the next century.